Knowledge Post: What is the core of supply chain management, and what are its key performance indicators?

What exactly does supply chain management entail? Today, let’s explore this together. We’ll break down the entire scope of the supply chain into three key components:

Core responsibilities of the supply chain — What exactly are we supposed to be in charge of?

Key processes in the supply chain — How each step, from order placement to delivery, is executed

Supply Chain Metric Logic — How to manage things with numbers

01   What is supply chain management?

1 , Definition of Supply Chain Management:

Supply chain management is the integrated management of product, information, and financial flows from suppliers to customers, with the goal of maximizing supply chain value.  

The supply chain is an integration of product flows, financial flows, and information flows.

Product flow: the physical movement of goods from suppliers to customers, which constitutes the supply chain’s material flow.

Cash flow: The movement of funds from customers to suppliers is the lifeblood of the supply chain.

Information flow: a two-way circulation that serves as the nervous system of the supply chain.

2 , The position of the supply chain within the enterprise:

The supply chain is one of a company’s three core functions—alongside R&D and marketing. R&D is responsible for… 0 to 1 , once a product is well-designed or a service is well-delivered, marketing is responsible for from 1 to N, Sell each high-quality product or service one by one, while the supply chain ensures that products and services are delivered at the right cost and pace.  

3 1. Supply chain management encompasses the following:

It is an integrated management framework that, in practical application, comprises three core domains: procurement and supply management, production and operations management, and logistics management—each of which spans the three major functional areas of enterprise management: sourcing, manufacturing, and sales.

The supply chain encompasses procurement management, operations management, and logistics management. Enhancing supply-chain performance begins with planning and procurement: simply put, procurement secures the necessary inputs, operations adds value through processing, and logistics delivers the finished products to customers. Procurement adheres to planned directives—determining what to purchase, how much, and when—while operations is responsible for deciding what to produce, how much, and when. The supply chain is driven by planning, with procurement, production, and logistics serving as its execution functions.

02   What are the core keys of supply chain management?

The objectives of supply chain management are clear: “Deliver the right product to the right place, at the right time, and in the right way.”

1 , Types of Supply Chains

There are two types of supply chains:

One type is the manufacturing supply chain: this supply chain integrates various raw materials through design, assembly, and production to create a complete, standalone product. Well-known examples include Huawei in the consumer electronics sector, Tesla in the automotive industry, Philips in medical devices, and Procter & Gamble in fast-moving consumer goods, among others. The manufacturing supply chain primarily serves… “Customer” is the factory’s objective to improve the efficiency of assembling various types of materials at the facility.

One type is the retail‑oriented supply chain: after an item is manufactured in a factory, it passes through distribution, services, transportation, and finally reaches your hands for consumption. A well‑known example is… : JD.com and Taobao in the online marketplace, Walmart in the offline retail sector, Haidilao for dine-in dining, and a wide array of apparel brands in brick-and-mortar retail. / Pharmaceutical companies, among others. Its primary “customers” are consumers. : The goal is to enhance the consumer experience during the purchasing process.

2 The essence of supply chain management

To understand the essence of supply chain management, we need to grasp SCOR A model, a standard reference framework for supply chain processes, a diagnostic tool for the supply chain, and also a powerful enabler of supply chain integration:

SCOR The model divides supply chain management into six core functions: planning, procurement, manufacturing, sales, distribution, and returns.

Plan: This is SCM In the strategic dimension, a sound plan entails establishing a set of methods to monitor the supply chain, enabling it to deliver high-quality, high-value products or services to customers efficiently and at low cost.

Procurement: Select appropriate suppliers of goods and services, establish pricing, delivery, and payment procedures with them, and develop mechanisms to monitor and enhance management.

Manufacturing: Organize the activities required for production, testing, packaging, and preparing goods for shipment.

Sales: Identifying target customers for the product and selling it to end users through direct sales or a distribution network.

Logistics: Establish a warehouse network to deliver goods directly to customers.

Returns: This is the problem‑handling component of the supply chain, encompassing return management and after‑sales service, among other functions.

2 , Planning Process: The “Brain” of the Supply Chain

The planning process is the starting point of supply chain management; it determines… “What to do, how much to do, and when to do it”—the planning process also encompasses the following planning and management activities:

Demand forecasting: Predict future demand by analyzing historical data, market trends, and customer feedback.

Master Production Schedule: Based on demand forecasting, it specifies what to produce, how much to produce, and when to produce.

Procurement Plan: Define the procurement strategy, supplier selection criteria, procurement cycle, and purchase quantities.

Production Planning: Based on market demand and inventory levels, develop production plans and schedules, and coordinate production tasks and timelines.

Delivery Planning: Develop delivery strategies, select appropriate transportation modes, and determine delivery cycles to ensure customers receive their ordered products promptly.

Inventory Planning: Set safety stock levels to prevent overstocking or stockouts.

3 Procurement Process: The “Lifeblood” of the Supply Chain

The procurement process is a critical component of supply chain cost control; it determines… “Where to buy, how much to purchase, and when to buy” encompasses supplier selection and evaluation, procurement negotiation and contract execution, as well as purchase order management.

Supplier Management: A multi-dimensional evaluation framework is employed to select and assess suppliers.

Procurement Management: Responsible for the company’s procurement activities, including price inquiries, tendering, quotation preparation, order management, and other related processes, while continuously optimizing the procurement workflow.

4 , Production Process: The Core of the Supply Chain

The production process is a critical stage in transforming raw materials into finished products, and it determines… “How to produce, how much to produce, and when to produce.”

Production Scheduling: Based on the production plan and the availability of raw materials, determine the specific sequence and timing for executing production tasks.

Quality Control: Implement rigorous quality control measures throughout the production process to ensure that products meet established quality standards.

Cost Management: Monitor costs throughout the production process, including raw material costs, labor costs, equipment depreciation, and more.

5 , Logistics Process: The Key to Supply Chain Flow

It is the ultimate manifestation of supply chain efficiency and determines the product. “How to transport, how much to transport, and when to transport,” encompassing aspects such as mode of transport, transportation route, shipping costs, cargo tracking, and customer complaints.

Warehouse Management: Involves the storage and management of raw materials, work-in-progress, and finished goods, including warehouse layout planning, inbound and outbound logistics, and inventory counts. Properly managing inventory levels helps ensure the safety and quality of stored items.

Transportation Management: Select the appropriate mode of transport—such as road, rail, or air—implement multimodal transportation, and choose suitable carriers. The core of transportation management lies in optimizing routes and reducing transportation costs to enhance overall efficiency.

Delivery Management: Ensuring products are delivered to customers accurately and on time, encompassing delivery lead times, cargo integrity, and customer satisfaction.

6 , Returns: The final link in the supply chain

The core of returns is determined by… “How to handle returns and how to enhance customer satisfaction.” Return management encompasses activities related to returns and reverse logistics, with a primary focus on controlling return rates and costs.

03   What are the key performance indicators in supply chain management?

Understanding supply chain efficiency can be achieved by… 10 Key Performance Indicators for the Supply Chain KPI Conduct measurements to help understand and assess the enterprise’s supply chain operational performance:

1 ) On-time delivery rate (On-Time Delivery, OTD)

Calculation formula: On-time delivery rate = ( Number of orders delivered on time  /  Total number of orders ) * 100%

Indicator significance: Measures the percentage of orders delivered to customers within the agreed time frame, serving as a key metric for customer satisfaction and loyalty.

2 ) Order cycle time (Order Cycle Time, OCT)

Calculation formula: Order cycle time  =  Order Completion Date  -  Order receipt date

Indicator significance: Tracks the time required to process, fulfill, and deliver orders to customers; a shorter cycle time indicates a stronger ability to respond to customer needs.

3 ) Inventory Turnover Ratio (Inventory Turnover, IT)

Calculation formula: Inventory Turnover Ratio  =  Cost of sales  /  Average inventory value

Indicator significance: Measures the efficiency of a company’s inventory management, reflecting the relationship between the goods sold annually and the average inventory level.

4 ) Order delivery rate (Order Fulfillment Rate, OFR)

Calculation formula: Order delivery rate = ( Actual number of orders delivered  /  Total number of orders ) * 100%

Indicator significance: Measures the enterprise’s ability to deliver customer orders on time, reflecting the efficiency of production and logistics operations.

5 ) Cost efficiency (Cost Efficiency, CE)

This metric does not have a specific formula; it is a comprehensive assessment that encompasses procurement costs, inventory holding costs, transportation costs, and more.

Indicator significance: Measures the relationship between supply chain management costs and benefits.

6 ) Supplier Performance (Supplier Performance, SP)

This metric is typically assessed by comprehensively evaluating suppliers’ delivery quality, delivery timeliness, service levels, and other factors; it does not have a specific formula.

Indicator significance: Measures the supplier’s overall performance.

7 ) Inventory Accuracy (Inventory Accuracy, IA)

Calculation formula: (1 - | Actual inventory quantity  -  System records inventory levels. | / System records inventory levels. ) * 100%

Indicator significance: Measures the degree of discrepancy between a company’s actual inventory and its system‑recorded inventory.

8 ) Logistics costs (Logistics Cost, LC)

Calculation formula: Logistics cost  =  Transportation costs  +  Warehousing costs  +  Other related logistics costs

Indicator significance: Reflects the total costs incurred by a company’s logistics activities, such as transportation and warehousing.

9 ) After-sales service response time (After-Sales Service Response Time, ASRT)

This metric has no specific formula; it is typically measured by statistically tracking the time elapsed from when a customer submits an after-sales service request to when they receive a response.

Indicator significance: Measures the speed and efficiency with which a company responds to customer after-sales service requests.

10 ) Cash Conversion Cycle (Cash Conversion Cycle, CCC)

Calculation formula: Cash Conversion Cycle  =  Days of inventory turnover  +  Days Sales Outstanding (DSO)  -  Days Payable Outstanding

Indicator significance: It measures the length of time required for a company to convert its resources into cash flow and serves as an important metric for assessing the efficiency of working capital management.

Summary

The success of supply chain management hinges not only on optimizing individual links but, more importantly, on the coordination and integration of the entire system.